2005 Legislative Compendium: Tax Reform

Two issues dominated the 2005 legislative agenda - fixing the school finance system deemed unconstitutional by a state court and delivering billions of dollars in property tax relief. The biggest obstacle was how to offset $3.7 billion in property tax reductions. The magnitude of the dollars needed, and the challenge of finding them, meant the issue commanded center stage, influencing the progress - or lack thereof - on many seemingly unrelated bills.

Despite the court's ruling, and hundreds of hours devoted to
crafting a workable tax plan, legislators were unable to pass a tax
bill during the regular legislative session, or during the first
special session that ended July 20. The governor called a second
special session the very next day to address the taxing dilemma. To
date, an agreement between the House and the Senate seems
elusive.

On its own or via court order, the legislature will ultimately
adopt a tax reform plan. Regardless of when the issue is resolved,
medicine's position will remain the same: Taxing patient care is
neither good public policy, nor in the best interest of Texas.
Unlike other businesses, physician practices cannot pass on a tax
increase due to fixed payments from government payers and
non-negotiable commercial plan payments. Moreover, physicians
already provide $1 billion in charity care and significant
subsidies to Medicare, Medicaid, the Children's Health Insurance
Program (CHIP), and other public programs that pay substantially
below-market rates.

TMA will be actively engaged in the tax debate as long as the
legislature continues discussion on school finance reform. Outlined
below are several scenarios that would rope in medicine.

To replace school property taxes with state revenue,
legislators must replace or modify the existing franchise tax to
capture more businesses. Currently, capital-intensive industries
are the hardest hit by the existing tax structure. Legislators
would like to expand the tax base to service industries, which
would include health care. Another possible mechanism to broaden
the tax base would be to replace the existing franchise tax with
a payroll tax at a low rate. An expanded business tax could
affect most physician practices.

Additionally, the governor and several legislators have
proposed taxing elective cosmetic surgical procedures. In both
the regular and special legislative sessions, amendments were
offered. Medicine vehemently opposed the tax because it sets up a
dangerous precedent for directly taxing other medical services.
Plus, who determines who pays the new tax? The line between
"cosmetic" and "reconstructive" surgery is not always clear, and
that would leave it up to state tax auditors to determine medical
necessity.

Physician Tax Credits

If physicians are not excluded from a tax bill, the legislature
is receptive to tax credits to at least ameliorate the impact.
During the regular legislative session, both the House and Senate
versions of the tax bill included tax credits for physicians
participating in public programs. The House version offset the tax
impact on physician practices by allowing tax credits based on the
practice's Medicare, Medicaid, and CHIP revenues, but only if those
programs composed 15 percent of the physician's practice. In the
Senate, the 15-percent threshold was eliminated, but the bill would
have allowed a tax credit equal to 20 percent of any physician's
total revenues from Medicaid and CHIP only. Medicare was
excluded.